Four Keys to Managing Utilities Regulations
For the past several decades, a major challenge facing utilities has been the constant evolution of the regulatory landscape. Utilities have seen a dizzying array of rules impact their service capabilities and bottom lines. These regulations range from emissions and water quality standards to renewable energy subsidies and telecom siting restrictions. In addition, increasing activity in courts and legislative bodies has further complicated utilities’ ability to develop comprehensive compliance plans.
The changes in regulatory standards across the United States, Europe, and Asia are impacting utility service providers at a cost of billions of dollars annually. These costs are documented in a study prepared for the U.S. Environmental Protection Agency last year by Industrial Economics, Inc., and E.H. Pechan & Associates.
To successfully manage capital investments and ensure service delivery, today’s utility leadership requires a new level of focus on the management of regulatory risk. Industry leaders should consider four elements in their government affairs and operations strategy, including:
- Effective engagement with regulators and political entities
- Prioritization of compliance efforts
- Anticipation of potential sources of delay
- An understanding of the financial impacts of regulatory changes
In many cases, changes in regulation can be the result of extended negotiations involving the exchange of information between government entities and industry. Early engagement in the rule-making process can help avoid unnecessary capital outlays. Time and again, initial regulatory proposals have varied widely from final rulings.
“It is critical for infrastructure companies, investors and service providers to know their regulatory vulnerabilities,” said Tom Lawler, principal of Lawler Strategies, a Washington, D.C.-based energy policy consulting firm. “Regulatory risk can take many forms, including legislation, court action or changes in regulatory goals. Organizations must understand that it’s not a question of whether they’re going to be regulated, but how and when.”
Utility providers must understand their assets and how they fit into a range of potential regulatory schemes. They should also determine what regulators are trying to accomplish through new mandates or changes to existing rules. Further, it is critical to understand the political realities driving regulatory action. This can include environmental and public safety goals, budgetary concerns or other interests.
“While developing constructive relationships with regulators, utilities must be careful to avoid getting ahead of the political system,” said Paul Weida, Black & Veatch Government Affairs Vice President. “Prioritization should be given to mandates that have previously been codified into law. Recent events show how managing regulatory risk must include the possibility of an absence of regulation.”
For instance, Weida noted that in 2008-2009, industries across the globe prepared for the implementation of a global carbon tax. From the creation of new carbon trading platforms to the deployment of CO2-reducing technology, the political consensus was that for the first time in history, the tax would become a reality.
In preparation, the industry responded by allowing the pricing of carbon to be considered in the planning of new facilities. More costly designs that minimized carbon footprints were given additional consideration. This was done with the expectation that the secondary market for carbon would make them more competitive with traditional technologies in the future. However, the carbon tax bill failed in the U.S. Congress in 2009. This left early adopters of carbon technologies without the market incentives needed to make them competitive.
Once a set of priorities has been identified, careful consideration should be given to the potential causes of project delays. Those deferrals can range from complex legal action to a simple lack of quorum.
“Anticipating potential project interruptions and preparing for planned outages can help avoid unnecessary public relations issues by managing consumer and legislative expectations,” said Lawler.
Utilities must be prepared to prove the financial ramifications of legislation and mandates, prior to final adoption. This is key in light of significant compliance costs and increasing public pressure for more sustainable solutions.
“The financial impacts of regulation will drive a variety of actions, from accessing of the private capital markets to requests for public financing,” added Weida. “To navigate these challenges, utilities need to work with entities that understand both the operational and financial implications of proposed rules. By doing this, utilities can effectively present their side of the issue to the decision makers.”
With a thorough understanding of their regulatory environment, industry leaders can focus on positioning their assets in a way that minimizes the risks of regulatory uncertainty, while allowing them to be better prepared for the future.
Subject Matter Expert
Paul Weida: WeidaPW@bv.com
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